Trade the S&P 500 Online | FXTRADING.com - International

Trade the S&P 500 Online

Trade the US markets via our S&P 500 CFD

Speculate on the strength or weakness of the US economy via the FXTRADING.com US500 CFD. Trade both long and short with tight spreads, fast execution.

A Primer on the S&P 500

  • Established over 60 years ago
  • Represents the 500 companies in the US
  • Capitalisation-weighted
  • Made up of 11 broad sectors
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Established in 1957
Having been traded for over 60 years, it has long been is a go-to benchmark for traders as it captured a broad read of the US economy.

The S&P 500 Represents the largest 500 companies in the US
To be more specific, it was the largest 500 US companies listed on the on the NASDAQ composite and NYSE (New York Stock Exchange). Therefore, it excludes large corporations which have chosen not the be listed on those exchanges. For example, Ernst & Young had a turnover of around $36 billion in the US yet are not listed on the exchange, so is not included in the S&P 500.

Capitalisation-weighted
The 500 constituents of the S&P 500 are given a weighting based on their market capitalisation of outstanding shares. This effectively means that higher priced stocks have a greater impact on the index, which some argue has made it less reliable as a general indicator of the US economy.

In recent years FAANG stocks (Facebook, Apple, Alphabet, Netflix, Google) have gained a disproportionate weight to the index so traders often keep a close eye on the performance of these stocks to trade the S&P 500. Regardless, it remains a trader’s favourite and produces clean, volatile price action which often plays nicely with technical levels.

The S&P 500 Contains 11 Broad Sectors
The 500 stocks within the S&P 500 can be grouped into 11 main sectors. Whilst sector analysis is helpful to stock investors to help them see which sectors out outperforming (or underperforming) relative to the index, it is also useful for S&P 500 traders to track as it can help them gauge the overall strength of the index. For example, if all sectors are rising it paints a rosier picture for the index, whereas if some sectors are falling and some are rising, we would expect less upside potential for the index.

  • Consumer Discretionary
  • Consumer Staples
  • Energy
  • Financials
  • Health Care
  • Industrials
  • Information Technology
  • Materials
  • Real Estate
  • Telecommunication Services
  • Utilities

How Can You Trade the S&P 500 Index?

As the S&P 500 is an index and not a tradeable instrument, traders speculate on the index via derivates markets. As a CFD (contract for difference) is a form of derivate, you can effectively trade the S&P 500 via FXTRADING.com on our US500 CFD.

By placing a trade on the US500 CFD via our MT4 platform, the trader is not entering a contract or becoming an owner of the underlying market. Yet they still gain access to real-time pricing and can trade either long and short (buy and sell).

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Long example: S&P 500 CFD (US500)
A trader buys 15 contracts of the US500 CFD at USD $3,160

  • If the price rises to $3,300 the trader could exit for a profit around $2,100
    • (# contracts x contract size) x (exit price – entry)
    • (15 x 1) x (3,300 – $,160)
  • If prices fall to $3,095 the trader could exit for a loss around -$975
    • (# contracts x contract size) x (exit price – entry)
    • (15 x 1) x (3,095 – 3,160)
  • A 1% margin requirement with 100:1 leverage requires $474 of capital
    • (# contracts x contract size x price) / leverage
    • (15 x 1 x 3,160) / 100

 

Short example: S&P 500 CFD (US500)
A trader sells 10 contracts of the US500 CFD at $2,600

  • If the index falls to $2,000 the trader could exit for a profit around $6,000
    • (# contracts x contract size) x (entry – exit price)
    • (10 x 1) x (2,600 – 2,000)
  • If the index rises to $2,800 the trader could exit for a loss of around -$2,000
    • (# contracts x contract size) x (entry – exit price)
    • (10 x 1) x (2,600 – $2,800)
  • A 1% margin requirement with 100:1 leverage requires $260 of capital
    • (# contracts x contract size x price) / leverage
    • (15 x 1 x 2,600) / 100

 

Costs associated With CFDs

Spread:
The spread is the difference between the bid and the ask price, which can be viewed on the deal ticket, market watch window or chart within MT4. As the spread is applied to your open profit/loss (P&L) when a trade is opened, it will initially show a negative number until the market moves in your favour by enough to offset the spread. Due to our top-tier liquidity providers, FXTRADING.com offer come of the tightest spreads in the industry and is a relatively minor cost.

Swaps:
At the close of each day, swaps are calculated on open positions and can be either a debit or credit to your floating P&L. These relatively minor charges (or rebates) are derived from the interbank rate of the country the underlying market is traded in. Therefore, the swap for US500 CFD is based upon the Federal Reserve interbank rate.

As markets are closed over the weekend yet interest rates are calculated daily, Friday is a triple swap day for the US500 CFD, to account for Saturday and Sunday when markets are closed.

Market Drivers For the S&P 500

  • Liquidity
  • The Fed
  • Economic data
  • Risk-appetite
  • Company earnings
  • Share buybacks
  • Options expiration
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Liquidity
In its purest form, liquidity refers to the ease of which one can buy or sell an asset. If a market is highly liquid (like forex markets) it can attract investments. Yet a relatively illiquid asset such as a house can take a long time to buy or sell.

As for the impact of liquidity on an index such as the S&P 500, if the Fed (Federal Reserve) are to inject liquidity into the system, it tends to benefit the index as more cash is available for investors to invest (in what is arguably already a highly liquid market). Of course, the reverse is true; if the Fed removes liquidity, it removes a pillar of support for equity markets and, if it is drastic enough, weigh on the index.

An extreme example of liquidity being remove was the credit crunch in 2008 where stocks plummeted into the abyss as the GFC unfolded. An extreme example of liquidity supporting markets was the Fed pumping over $6 trillion into the markets which saw the S&P 500 rebound sharply from its March 2020 low.

The Fed
The Federal Reserve is the central bank (CB) of the US and the most closely watched in the world. As they control the level of liquidity the inject or withdraw from the financial system, they are a key driver to indices such as the S&P 500.

In order for traders to predict whether the Fed will inject liquidity (bullish stocks) or withdraw liquidity (bearish stocks) they keep close tabs on FOMC meetings and economic data.

Economic data
If company earnings reports are micro analysis, then economic data to the index is macro-economic data. The key metric for most if not all markets is growth. If investors see that growth is weak, or is expected to be in future, it can weigh on the broader market such as the S&P 500. Whilst if growth is expected to rise, it can support the market.

Whilst there are literally hundreds of data points that analysts follow to ascertain growth potential, key economic releases for S&P 500 traders are the ISM PMI and Market Economics PMI. Employment reports such as NFP can be used to confirm strength or weakness of the economy so also impact the index.

Risk-appetite
When investors are feeling positive about the future of an economy, they tend to buy riskier assets such as equities. The reverse is also true; if they fear the future, riskier assets such as equities tend to suffer. This makes the S&P 500 an excellent proxy for risk, although it is also prudent to monitor other indices and markets such as gold and AUD/JPY to get a better feel for how widespread the current sentiment is.

Company earnings
To stock traders, company earnings are paramount to the direction of the stock. If an equity is not producing enough growth (or not perceived to in the future) it can weigh on the share price. If this happens to enough stocks within the S&P 500, it can of course weigh on the index.

As most companies release their earnings quarterly, there are four earnings seasons throughout the year which can make a notable impact on the S&P 500. Whilst there is no strict start or end date for each ‘season’, they typically kick off two or three weeks after the end of a financial quarter (March, June, September, December).

What traders are seeking are clusters of earnings reports to be released together over a short period of time, as it will likely result in volatility. As the greater the miss or beat relative to market expectations, the greater move we would expect to see on the S&P 500.

Share buybacks
Also referred to as a share repurchase or stock buyback, a share buyback is the process of a company purchasing its own stock from the market with its own cash. It can be viewed as a company reinvesting within itself although, as it removes outstanding shares from the open market, an investors relative ownership of a given stock also rises.

At the individual level, share buybacks of single companies make little impact. Yet when we see periods like throughout 2019 where many companies were participating in buybacks, then it adds another level of support for the S&P 500 and can even help it trade higher.

Options expiration
Traders take note of options expiration dates as they can provide volatile reactions in the hours surrounding the expiration. Whilst options trading is outside the scope of this piece, it can be harder to decipher how the S&P 500 will react from a directional view around options expiring, but as they can provide volatility then traders tend to tread with caution on these dates. Furthermore, every quarter a ‘triple witching’ day occurs where options for stocks, indices and futures expire on the same day and can result in even greater volatility.

Seasonality and the S&P 500

Seasonality refers to the tendency for markets to move up or down over certain periods of the year. It is far from perfect and has many flaws, as it is simply an average of past performance (therefore, not predictive as such). Yet it can at least provide historical context and can be a ‘nice to know’ feature of a market, assuming external forces do not spoil the relationship.

Read on to see examples of some popular seasonal patterns.

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Santa’s Rally:
Equities tend to perform very well in December as we head towards the Christmas break. Reasons typically attributed to this tendency are the positive sentiment on Wall Street as they wrap up the year, bonuses are reinvested and that there are tax incentives to do so. However, it could also be that a feedback loop is also driving prices higher, in the absence of a risk-off sentiment. But that is not to always say Santa’s rally materialises.

Sell in May and Go Away:
This is a well-known saying from Wall Street which suggest we should short the index in May. There have been many studies on this and most agree it’s not that straight forward. Yet the saying is more likely to originate from the fact that volatility can be lower through the summer months as traders go on vacation.

Monthly close statistics:

Between January 1989 and December 2019

  • November produced the highest average return of 1.55%
  • August has been the most bearish month, averaging a -0.74% loss
  • April and December closed higher 76.7% of the time
  • October has produced the highest volatility (using the average of the high to low range of the monthly candle) whilst June has been the least volatile
  • Excluding September, each month of the year closed higher over 50% of the tie (September is a coin flip at 50%)

Why Trade the S&P 500?

  • Trade long and short
  • Suitable for intraday through to longer-term investing
  • Take a broader market view of the US economy
  • Hedge an ETF or a portfolio of equities
  • Can be used as a proxy for risk
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Trade the S&P 500 Long and Short
As FXTRADING.com offer the S&P 500 as a CFD, it can be traded both long and short. This is not always the case with the futures market, which can limit a trader’s ability to enter or exit the futures contract.

Suitable across multiple timeframes
With a slew of economic data, company reports and market-moving news, intraday traders have ample of opportunity to speculate on the S&P 500. It is also a viable instrument for traders swing traders to speculate over a few days to a few weeks, or investors to capitalise on its long-term bullish bias or deep bear markets.

Take a broader market view of the US economy
By trading the S&P 500, you can take a broader bet that the US economy will either outperform or underperform with bullish and bearish traders.

Hedge and ETF or portfolio of equities
If an investor holds a nasdaq ETF or group of technology stocks, they could look to offset risk by shorting the Nasdaq CFD (USTEC). Due to the generous leverage, the margin requirement to hedge is relatively small.

The S&P 500 Can Be Used as a Proxy for Risk
The index is to equity markets what AUD/JPY is to forex; a barometer of risk appetite. This means traders typically expect it to rise when investors are feeling confident about the future and sell-off when appetite for risk sours.

Why Trade the S&P 500 with FXTRADING.com?

  • Near 24 hour trading, 5 days a week
  • Competitive spreads
  • No re-quotes or dealing desk intervention
  • Leverage available up to 100:1
  • Multiple deposit options
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Near 24 hour trading, 5 days a week
With the ability to trade when the official exchange is open or closed, traders across the globe can speculate on the S&P 500 regardless of their time-zone.

Competitive Spreads
We pride ourselves on some of the tightest spreads in the industry, sourced from top-tier liquidity providers.

No re-quotes or dealing desk intervention
Trade with the comfort of knowing FXTRADING.com come are here to facilitate your trading, with fast execution and tight spreads.

Leverage available up to 100:1
With such generous levels of leverage, margin requirements (collateral) are minuscule relative to the underlying futures contract, making index trading more affordable to traders of all levels.

Multiple deposit options
Fund your account with AUD, GBP, EUR or USD via Skrill, Neteller, Poli or bank transfer.

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